nep-mon 2026-08-17 papers

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By:	Boris Hofmann; Aaron Mehrotra; Jan Paulick
Abstract:	The emergence of stablecoins has created a new channel to access US dollar liquidity in emerging market and developing economies (EMDEs), similar to the historical role of foreigncurrency deposits, or "deposit dollarisation". This has raised concerns about the possible implications for monetary control in EMDEs. Drawing on data on foreign currency deposits and dollar-pegged stablecoin inflows for more than 130 economies, we compare the dynamics and drivers of "stablecoin dollarisation" with those of conventional deposit dollarisation. We document that historical deposit dollarisation and recent stablecoin flows are both associated with similar macro-financial drivers, including the strength of exchange rate pass-through and sovereign or banking crises. We further document significant persistence in both deposit and stablecoin dollarisation, suggesting that dollarisation is hard to reverse once established. Unlike deposit dollarisation, stablecoin flows seem to be largely unaffected by either broad or specific capital flow restrictions. This likely occurs because stablecoins are partly circulating outside the regulatory perimeter. The historical record also suggests that moderate deposit dollarisation has been associated with somewhat higher inflation risks, although there is little evidence of significant impacts on monetary policy transmission.
Keywords:	dollarisation, capital flows, stablecoins, monetary control, EMDEs
JEL:	E44 E58 F32 F38 G15 G23
Date:	2026–07
URL:	https://d.repec.org/n?u=RePEc:bis:biswps:1370

By:	Timo Wochner; Lukas Hack; Niklas Potrafke
Abstract:	What inflation rate should central banks target? Using two global surveys, we provide evidence on inflation preferences among economic experts—the group whose models and judgments inform monetary policy. We document that, although experts’ preferred inflation rates are centered on central-bank targets, roughly half of them deviate (symmetrically) from the target. Cross-expert heterogeneity in preferences is driven by (i) beliefs about the costs of disinflation, (ii) normative views on the relative importance of different central bank objectives, and (iii) inflation narratives. Finally, we show that experts’ preferences influence their evaluations of monetary policy decisions, suggesting that experts’ preferences are likely to matter for policymaking.
Keywords:	inflation preferences, optimal inflation rate, economic experts, monetary policy
JEL:	E31 E52 E58
Date:	2026
URL:	https://d.repec.org/n?u=RePEc:ces:ceswps:_12850

By:	Jonathan Chiu; Cyril Monnet; Oliver Junye Xu
Abstract:	This paper develops a general equilibrium model to assess central bank digital currency (CBDC) design in a monetary system where traditional banks and “crypto banks” (i.e., banks that issue stablecoins) coexist. We compare tokenized and non-tokenized CBDC, showing that their desirability depends on the reliability of private money provision, the availability of collateral assets and the features of the crypto sector. Crucially, we show that the tokenization decision of CBDC matters for the equilibrium outcomes only when collateral use differs across sectors, identifying conditions under which tokenization is necessary to improve welfare. Tokenized CBDC can crowd out stablecoins and improve efficiency when crypto banks are not that trustworthy and crypto assets are scarce. Non-tokenized CBDC may be preferred when crypto transactions are less desirable or when reallocating reserves from traditional to crypto banks is beneficial. Our results highlight a trade-off between gains in payment efficiency and potential reductions in bank lending. These findings offer new policy insights on CBDC design under evolving financial conditions.
Keywords:	Money and payments, Digital assets and fintech, Payment and financial market infrastructures
JEL:	E50 E58
Date:	2026–05
URL:	https://d.repec.org/n?u=RePEc:bca:bocawp:26-14

By:	Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
Abstract:	We empirically show that a central bank’s ability to affect global energy prices crucially alters monetary policy transmission. We first provide novel evidence that euro area monetary policy significantly affects energy prices. Employing a Lucas critique-robust counterfactual framework, we find that this ability strengthens and accelerates transmission to inflation and substantially alleviates the inflation-output trade-off. We further show that this ability materially shapes the mandate-optimal policy response to an energy supply shock: the optimal response implies a smaller interest rate increase and a more favorable inflation-output allocation than in a scenario where energy prices are unaffected by monetary policy.
Keywords:	inflation, energy prices, monetary policy, monetary transmission mechanism
JEL:	C32 E31 E52 Q43
Date:	2026–07–10
URL:	https://d.repec.org/n?u=RePEc:bdp:dpaper:0102

By:	Rashid Mirzaakhmedov (The Central Bank of Uzbekistan)
Abstract:	This paper examines how foreign ownership of importing firms shapes exchange rate pass-through (ERPT) to import prices in Uzbekistan across three distinct monetary policy regimes. Using transactionlevel customs data matched with a firm ownership registry, I find that ERPT remained near-complete before inflation targeting but declined sharply following its formal adoption in October 2019. Foreignaffiliated importers exhibit significantly lower pass-through than domestically owned firms under inflation targeting, with the gap most pronounced for capital and intermediate goods. Rolling window estimation reveals that foreign affiliates adjusted more rapidly to the new monetary framework, suggesting that ownership structure and institutional credibility jointly shape import price dynamics. The results provide micro-level evidence that the central bankâ€™s credibility has weakened the exchange rate channel of inflation, while the growing presence of foreign affiliates reduces the effectiveness of exchange rate depreciation as an instrument for correcting the trade balance.
Keywords:	Exchange Rate Pass-Through; Import Prices; Foreign Ownership; Inflation Targeting; Transaction-level Customs Data; Uzbekistan
JEL:	F31 F14 E31 F23 E52
Date:	2026–08–07
URL:	https://d.repec.org/n?u=RePEc:gii:giihei:heidwp22-2026

By:	Francesca Caselli; Ms. Luisa Charry; Mr. Larry Q Cui; Mr. Pragyan Deb; Allan Dizioli; Alexandra Fotiou; Ben Park; Mr. Sebastian Weber
Abstract:	More frequent large macroeconomic shocks since the global financial crisis have entrenched uncertainty, particularly in Europe. This has increased the premium on central bank communication in guiding expectations and strengthening macroeconomic resilience. European central banks have responded by adapting their communication toolkits and styles. This study provides a systematic assessment of recent central bank communication across advanced and emerging European economies, combining a survey of institutional communication frameworks with novel text-miningbased indicators on monetary policy guidance in these economies over 2009-2025. While communication toolkits are broadly similar, their intensity and transparency differ markedly, with central banks in advanced economies making greater use of forward-looking tools. Central banks in both groups respond primarily to inflation uncertainty. However, communication strategies diverge, as central banks in advanced economies increasingly shift toward forward-looking language, whereas those in emerging markets shift toward more backward-looking communication. These patterns highlight credibility and institutional capacity as key determinants of central bank communication under uncertainty.
Keywords:	Central bank communication; uncertainty; forward guidance; monetary policy
Date:	2026–06–26
URL:	https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/133

By:	Wolswijk, Guido
Abstract:	This paper analyses the European prohibition of monetary financing from an economic perspective. The prohibition seeks to safeguard central bank independence in setting monetary policy to maintain price stability, and to preserve fiscal discipline, thereby preventing monetary policy from becoming constrained or hindered by fiscal policies. Imposing a prohibition on financing public deficits helps to ensure a clear separation of responsibilities between monetary policy and fiscal policy and is consistent with a range of macroeconomic theories, including monetarism and the fiscal theory of the price level. The current EU-wide ban is more stringent than those in place in Europe before the start of Economic and Monetary Union and also than those prevailing in other major currency areas of the world. Tasked with monitoring compliance with the prohibition among European national central banks, the European Central Bank (ECB) has developed certain standards over time, informed by definitions contained in EU regulations and by cases that have arisen over the years. Over the three decades since its introduction, the prohibition in general has been well respected, although a few actual or potential conflicts with the prohibition have required national central banks to take corrective action. Recent economic crises in Europe have given rise to academic proposals to reinterpret or circumvent the ban, notably during the COVID-19 pandemic. These suggestions have included central banks handing out “helicopter money” to the public and cancelling part of the government debt held by European central banks. In general, these proposals would seem to jeopardise the prohibition of monetary financing and ultimately weaken price stability and sound public finances. JEL Classification: E58, E61, E62, F45, K33
Keywords:	debt monetisation, fiscal policy, monetary financing, monetary policy
Date:	2026–08
URL:	https://d.repec.org/n?u=RePEc:ecb:ecbops:2026397

By:	Mr. Luis Ignacio Jácome; Mr. Nicolas E Magud; Samuel Pienknagura; Martin Uribe
Abstract:	We explore the historical link between populist regimes, fiscal monetization, and inflation, and how these links affect monetary policy in the 21st century. Using data for a large set of advanced economies and emerging markets since 1960, we show that, historically, left-leaning populist regimes are linked to increases in central bank lending to the central government, a gauge of deficit monetization. In turn, central bank lending is associated with marked increases in inflation. We show that past exposure to populism that relied on deficit monetization affects the conduct of monetary policy today. Countries with a history of deficit monetization and left-wing populist regimes systematically respond more strongly to deviations of inflation expectations from target. This effect persists even after controlling for the direct effect of past inflation on monetary policy rules. In the context of the literature of experienced learning, this novel finding sheds light on the persistence of past populist policies---central banks operating under the shadow of past populist regimes that relied on inflation-prone deficit monetization continue today needing to send stronger signals of their independence and commitment to price stability to effectively anchor inflation expectations.
Keywords:	Monetary Policy; Populism; Inflation Targeting; Fiscal Dominance; Past Inflation; inflation expectation; deficit monetization; monetary policy rule; IMF working papers; central bank lending; Inflation; Bank credit; Central bank credit; Output gap; Global; South America; Central America; Caribbean
Date:	2026–08–07
URL:	https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/167

By:	Ricci, Luca Antonio; Ahokpossi, Calixte; Belianska, Anna; khandelwal, khushboo; Lee, Sunwoo; Li, Bin Grace; Mu, Yibin; Quayyum, Saad; Nunez, Silvia Guadalupe; Ree, Jack Joo; Souto, Marcos Rietti; Simione, Felix
Abstract:	This paper reports key findings from the Sub-Saharan Africa Central Bank Digital Currency (CBDC) and Digital Payments Survey, shedding light on the motivations, benefits, and challenges of CBDC adoption, as well as the developments of digital private money and crypto assets in sub-Saharan Africa. It emphasizes the pivotal role of collaboration and shared knowledge in navigating the intricate landscape of digital currencies and assets in sub-Saharan Africa. As this evolving digital frontier is explored, the experiences and aspirations of the regionâ€™s central banks, as expressed in the survey, will help harness the potential for digital currencies, assets, and payments, and foster cooperation among countries in sub-Saharan Africa. A forthcoming IMF Departmental Paper will focus on key issues for countries in sub-Saharan Africa pertaining to CBDCs, private digital payments, and crypto assets. It will provide a deeper discussion of the benefits, costs, and risks of these digital payment systems and present policy options to enhance financial digital development and inclusion, while safeguarding macroeconomic and financial stability.
JEL:	E41 E42 E44 E58 G20 G21 G23
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19889

By:	Mátyás Farkas; Zoltan Jakab; Jesper Lindé
Abstract:	We study how policy expectations affect the estimated natural rate of interest (r) for the United States and the euro area. To discipline policy expectations, we incorporate information on future policy rates and long-term yields in episodes when the Fed and ECB provided forward guidance. For the post-Covid period, we find that r rises much more than in an otherwise standard specification that omits yield-curve observables. By implication, the post-Covid tightening of the monetary policy stance was not nearly as large as standard r* models imply, which helps explain why economic activity did not slow much when nominal policy rates were raised dramatically in 2022 to fight inflationary pressures. Yield-curve information pins down anticipated policy innovations and alters r* estimates and, thus, the monetary policy stance.
Keywords:	Natural Rate of Interest; Bayesian Inference; DSGE Model; Monetary Policy Stance; Convenience Yield; Forward Guidance; Covid tightening; IMF working papers; yield-curve information; Policy expectation; Covid period; Central bank policy rate; COVID-19; Inflation; Dynamic stochastic general equilibrium models; Global
Date:	2026–08–07
URL:	https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/168

By:	Marianna Blix Grimaldi; Fabienne Schneider; David Vestin
Abstract:	This paper examines the interaction between quantitative easing (QE) and the securities lending facility (SLF) using a detailed dataset on Riksbank QE purchases, Swedish DMO SLF transactions and OTC repo deals. A theoretical model further shows how excess demand for assets and search frictions shift the SLF from a backstop to a first-resort tool. Empirically and theoretically, we find that QE expansion is closely linked to higher SLF use. Narrowing spreads between SLF yields and market repo rates make the SLF yield a floor for secured lending, weakening ties to monetary policy benchmarks and potentially altering its transmission. QE announcements also increase SLF usage, raising moral hazard concerns. Theoretically, QE strengthens cash-borrowing dealers’ bargaining position and may reduce reliance on the repo market, with implications for market liquidity.
Keywords:	Financial markets and funds management, Market functioning, Market structure, Financial system, Financial institutions and intermediation, Monetary policy, Monetary policy tools and implementation
JEL:	E52 E58 G21
Date:	2026–03
URL:	https://d.repec.org/n?u=RePEc:bca:bocawp:26-9

By:	Alvarez-Blaser, Santiago; Auer, Raphael; Lein, Sarah; Levchenko, Andrei
Abstract:	This paper uses barcode-level price data for 16 advanced and emerging market countries over the period 2005â€“2022 to investigate the role of individual firms and product categories in aggregate inflation. We decompose inflation into the component due to macroeconomic shocks and the granular residuals capturing the impact of individual firms and product categories, respectively. In advanced economies, the firm granular residual accounts for 41% of the variance of overall inflation, while the product category granular residual accounts for another 15%. Most of the variation in the firm granular residual is due to idiosyncratic shocks rather than to higher sensitivity of larger firms to common shocks. In the cross-section of countries, granular residuals are less important in economies with less concentrated market shares and higher inflation, such as emerging markets. Granular forces also contributed to the post-COVID inflation surge, with the firm-level component explaining roughly one-third of the 2021â€“2022 inflation in advanced economies. Finally, granularities are associated with a more sluggish response of inflation to monetary policy shocks, suggesting that market concentration can influence monetary non-neutrality.
Keywords:	Inflation
JEL:	E31 E32 L11 L16
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19844

By:	Mr. Etienne Vaccaro-Grange
Abstract:	Small open economies often anchor their exchange rate to a basket of foreign currencies, with weights typically set from trade shares or financial exposure. Such schemes ignore the heterogeneity of pass-through across currencies and the covariance structure of bilateral rates, and therefore do not minimize the volatility of imported inflation, the central bank’s mandate. This paper proposes a minimum-variance framework — formally analogous to a Markowitz portfolio problem in pass-through space — in which basket weights minimize the variance of exchange-rate-driven imported inflation, subject to a constraint that preserves the basket’s cumulative pass-through. Applied to the case of Fiji, an import-intensive island economy with a five-currency basket, the optimization reduces the variance of imported inflation by close to twenty percent, with results robust across alternative specifications.
Keywords:	currency basket; exchange rate pass-through; minimum-variance portfolio; small open economies; monetary policy
Date:	2026–06–26
URL:	https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/131

By:	Sami Alpanda; Serdar Kabaca; Kostas Mavromatis
Abstract:	This paper examines the optimal coordination of conventional and unconventional monetary policy tools in an economy with heterogeneous households and mortgage debt. We build a dynamic stochastic general equilibrium (DSGE) model featuring three household types—savers, borrowers, and renters—and include housing investment, long-term fixed-rate mortgages, and a housing production sector. The central bank controls both the short-term interest rate and the long-term rate by adjusting the maturity composition of government bonds. We show that household heterogeneity significantly alters the optimal policy response to macroeconomic shocks. Specifically, after a cost-push shock, optimal policy calls for increasing the short-term rate to contain inflation while simultaneously lowering the long-term rate to ease financial pressures on indebted households and renters. This combination speeds up the recovery of investment and output, stabilizes inflation, but exacerbates consumption inequality. By contrast, in a representative agent model, the optimal response is to raise both rates. Our results underscore the need to consider distributional consequences in monetary policy design and indicate that yield curve control can serve as a valuable tool in heterogeneous economies.
Keywords:	Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Monetary policy tools and implementation
JEL:	E40 E43 E52
Date:	2026–06
URL:	https://d.repec.org/n?u=RePEc:bca:bocawp:26-18

By:	Bartram, Söhnke; Grinblatt, Mark; Xu, Yan
Abstract:	The relative restrictiveness of a central bankâ€™s supply of money predicts the raw and risk-adjusted returns of its currencyâ€”both next month and at least three years into the future. Archived data, known by currency traders at the time, estimates central bank restrictiveness as a scaling of the residual from out-of-sample panel regressions of M1 on macroeconomic variables tied to domestic and international transaction requirements. Carryâ€™s ability to forecast currency returns is subsumed by the central bank restrictiveness signal, which also forecasts inflation.
Keywords:	Money supply
JEL:	F31 G12 G15
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19881

By:	Dräger, Lena; Marenčák, Michal; Nghiem, Giang; Paloviita, Maritta
Abstract:	This paper examines cross-country differences in consumer expectations about macroeconomic outcomes and mortgage borrowing conditions within a monetary union. Using harmonized microdata from the ECB Consumer Expectations Survey for eleven euro area countries, we document significant national disparities. By sequentially adding a rich set of consumer- and country-specific macro controls to pooled regressions with country fixed effects, we find that these factors account for much, but not all, of the cross-country heterogeneity in expectations. These remaining differences likely reflect unobserved countryspecific factors, highlighting the need for country-tailored monetary policy communication to effectively stabilize consumer expectations.
Keywords:	Country heterogeneity, Expectations, Consumer Expectations Survey
JEL:	E31 E52 D30 D84
Date:	2026
URL:	https://d.repec.org/n?u=RePEc:zbw:bofrdp:342404

By:	Jo, Jungkeon; Adjemian, Michael; Etienne, Xiaoli
Abstract:	We study how U.S. biofuel policy shocks transmit through agri-food supply chains to downstream markets, including consumer prices, food prices, and food expenditures. Drawing on the institutional structure of U.S. biofuel policy and high-frequency price movements around regulatory announcements, we construct a novel biofuel policy news series and use it as an instrument to estimate the causal effects of biofuel policy shocks on upstream commodity and downstream retail markets. A stringent biofuel policy shock leads to statistically significant inflation across both upstream and downstream markets. In response to the shock, biofuel, oil, and agricultural commodity prices rise substantially; in the downstream market, consumer food prices and the headline CPI increase, while real food expenditures decline. Specifically, fats and oils prices rise more than other food subcategories. Consumer inflation expectations rise following the shock. Weaker statistical evidence indicates that producer food price subcategories respond more strongly than their CPI counterparts. These findings reveal a fundamental trade-off in biofuel policy. While higher commodity prices support agricultural producer revenues, consumers finance these gains through higher retail prices for both fuel and food, with lower-income households bearing a disproportionate burden.
Keywords:	Agricultural Finance, Farm Management
Date:	2026
URL:	https://d.repec.org/n?u=RePEc:ags:aaea26:404350

By:	Pitters, Julia; Seitz, Franz
Abstract:	The decline of cash used for transaction purposes as well as the increase in total currency in circulation is usually discussed with respect to cost, efficiency and technological progress, i.e. digitalization. A large literature estimates the costs of cash production, distribution and handling. By contrast, the societal value of cash remains far less investigated and rarely quantified. This asymmetry matters because policy debates that monetize costs but leave benefits unconsidered may undervalue a payment instrument. The paper establishes a composite indicator capturing cash's value to society across five key dimensions: resilience, privacy, inclusion, cost control, and competition-supplemented by consumer surplus from seigniorage. We apply the methodology to Germany but the framework is designed to be replicable across countries and to support more balanced government and central-bank policy analysis. It combines a representative consumer survey, expert interviews, macro data and interdisciplinary workshops. In the base calibration, the aggregate value equals around 1.2 % of GDP. These results suggest that policy evaluations should incorporate cash's multifaceted benefits alongside costs. Recognizing cash's broader societal role can guide central banks and policymakers in fostering balanced payment ecosystems that preserve both innovation and public redundancy.
Keywords:	cash value, public money, payment system, inclusion, privacy, resilience
JEL:	D12 E41 E42 E58
Date:	2026
URL:	https://d.repec.org/n?u=RePEc:zbw:imfswp:342551

By:	Kodjovi M. Eklou
Abstract:	Exchange rate movements have implications for the purchasing power of residents or voters. Given that the exchange rate is often seen as a barometer of government performance, there could be strong incentives to influence exchange rate valuation during elections. This paper investigates whether political economy factors affect Foreign Exchange Intervention (FXI) policy across countries. It investigates whether central banks tend to implement FX sales, leaning against depreciations, during electoral periods in a sample of 28 countries including both advanced (AEs) and emerging (EMs) economies over the period 2000-2019. The results show that EMs with competitive elections tend to implement more and larger FX sales in pre-electoral period, compared to post-election period, given their political popularity. Further, this result is driven by countries where political pressures on central bank governors are more prevalent. Furthermore, the paper also finds that monetary policy transparency has the potential to mitigate this politically driven FXI during electoral period. Finally, the paper discusses policy implications given that politically motivated FX sales could hamper the ability of central banks to effectively respond to large shocks.
Keywords:	Foreign Exchange Interventions; Electoral Cycles; Monetary Policy; Political Economy; Transparency.
Date:	2026–06–26
URL:	https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/130

By:	Ivan Jesus Romero Mamani (Universidad Alberto Hurtado)
Abstract:	This document analyzes the demand for dollars in Bolivia, emphasizing how individuals turn to foreign curren-cies as a refuge during periods of economic instability and de-valuation expectations. Using the autoregressive distributed lag model (ARDL), the analysis incorporates key variables, includ-ing the M2 money supply, real interest rate, inflation, and de-valuation expectations, to estimate a dollar demand function. The findings reveal that economic uncertainty and a preference for more stable assets significantly drive dollar demand. These results align with Cagan’s theory, highlighting the inverse re-lationship between inflation and the willingness to hold local currency. Quantitatively, the estimated demand for dollars in 2023 linked to these factors amounts to approximately $us760 million, providing a monthly monitoring tool. Dynamic simu-lations and structural impulse-response analysis further reveal that exchange rate shocks induce persistent contractions in real money demand, in contrast to inflation shocks, whose effects are more limited and short-lived. These findings highlight the role of the dollar as a value-preserving asset in volatile environ-ments and underscore how macroeconomic conditions and policy stability can shape portfolio decisions under currency co-circulation schemes.
Keywords:	Foreign Currency Demand; Store of Value; Cur-rency Substitution.
JEL:	E41 F31 E31
Date:	2025
URL:	https://d.repec.org/n?u=RePEc:iad:wpaper:1025

By:	Beaudry, Paul; Hou, Chenyu; Portier, Franck
Abstract:	The paper examines whether the US evidence in favour of a nonlinearity in the Phillips curve is robust or fragile. To this end, we use both cross city and aggregate time series data. We are particularly concerned with the possibility that the evidence in favour a nonlinear Phillips curve may is fact be driven by improperly controlling for inflation expectations. Our finding suggest that the evidence in support of a nonlinear Phillips curve is very fragile.
Keywords:	Inflation; Phillips curve; Inflation expectations
JEL:	E31 E37 E7
Date:	2025–02
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19950

By:	Andrade, Philippe; Gautier, Erwan; Mengus, Eric; Moench, Emanuel; Schmidt, Tobias
Abstract:	We provide direct micro evidence that households link public debt and inflation in a way consistent with a fiscal dominance logic. We design a randomized controlled trial to identify how fiscal news lead individuals to revise their debt-to-GDP and inflation expectations. We also provide a way to elicit individualsâ€™ views about the fiscal space. Consistent with fiscal dominance, we find that individuals who consider that fiscal resources are stretched also associate larger debt-to-GDP with higher inflation. By contrast, individuals who think there is fiscal space do not make that connection. We study how these results matter for monetary pol- icy by introducing a New Keynesian model in which agents have heterogeneous beliefs about the fiscal space. Such beliefs imply a policy tradeoff for the central bank: Agents who expect fiscal dominance in the future exert upward pressures on inflation. Even an active central bank partially tolerates these price pressures due to the real costs of completely stabilizing prices.
Keywords:	Inflation expectations
JEL:	E31 C83 E63 D84
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19862

By:	Gulan, Adam; Silvo, Aino
Abstract:	In both the U.S. and the euro area, the share of market finance in aggregate corporate credit has grown over time. To study the implications of the corporate debt structure for the transmission of monetary policy, we develop a New Keynesian DSGE model in which firms differ in productivity and may finance themselves with either bonds or loans. Our setup makes the aggregate corporate debt composition and firms' credit access endogenous and dependent on aggregate economic conditions. The model rationalizes the empirically documented substitution from bank loans to bond finance following a monetary policy contraction. Credit is squeezed for those bank-dependent firms that cannot access the bond market. A structural shift in the aggregate bond-to-loan ratio among credit-eligible firms affects financial market dynamics, but does not materially change the overall impact of monetary policy shocks on the macroeconomy. Instead, in an economy with greater credit access, aggregate demand is less responsive to monetary policy shocks.
Keywords:	Monetary policy, corporate debt, bonds, bank credit
JEL:	E32 E44 E52 G32
Date:	2026
URL:	https://d.repec.org/n?u=RePEc:zbw:bofrdp:342406

By:	Boehnert, Lukas; de Ferra, Sergio; Mitman, Kurt; Romei, Federica
Abstract:	We investigate how the composition of expenditure shapes the transmission of monetary policy in a currency union. European Monetary Union data reveal three facts: (1) higher inequality countries have larger service expenditure shares; (2) monetary policy has a weaker output impact in these high-service-share, high-inequality countries; and (3) monetary policy induces systematic trade flows between high- and low-service-share countries. We develop a New Keynesian model with non-homothetic preferences and heterogeneous sectoral income that rationalizes these facts. Procyclical inequality, driven by wealthier householdsâ€™ greater income exposure to services, buffers poorer householdsâ€™ consumption to contractionary shocks, dampening overall policy transmission. Our findings suggest that accounting for cross-country differences in consumption and income distributions is essential for understanding common monetary policy.
Keywords:	Monetary policy; Monetary union; International capital flows; Non-homothetic preferences
JEL:	E52 F36 E21
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19872

By:	QIU, Zhesheng; Wang, Yicheng Wan; Xu, Le; Zanetti, Francesco
Abstract:	This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sectorâ€™s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages.
Keywords:	Production networks
JEL:	E6 E52 F41
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19828

By:	Felipe Alves; Giovanni L. Violante
Abstract:	As the economy emerges from a crisis, macroeconomic policy confronts a dilemma: a protracted stimulus can foster a more inclusive labor market recovery, yet risks igniting inflation that ultimately undermines workers’ welfare through real income erosion. This tension amplifies in the presence of the ZLB and aggregate capacity constraints. We embed this insight into a quantitative model of the US economy. We study how monetary and fiscal policies managed this inflation-inclusion trade-off after the pandemic, contrasting actual outcomes with counterfactual scenarios. Our experiments yield five findings: (i) the trade-off was unusually difficult because U.S. policy was squeezed between these two constraints; (ii) inflationary pressures arose from the joint deployment of prolonged U.S. monetary and fiscal stimulus; either policy alone would have produced milder price dynamics; (iii) either inclusive fiscal policy or inclusive monetary policy in isolation would have been sufficient to contain the negative labor market hysteresis at the bottom of the distribution; (iv) inclusive fiscal policy combined with a more traditionally inflation-focused central bank would have achieved higher welfare for the vast majority of U.S. households; (v) welfare effects reflect mostly corrections of incomplete-market inefficiencies rather than gains from aggregate stabilization.
Keywords:	Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission
JEL:	E21 E24 E31 E32 E52 J24 J64
Date:	2026–04
URL:	https://d.repec.org/n?u=RePEc:bca:bocawp:26-13

By:	Emanuel Kohlscheen; Aaron Mehrotra
Abstract:	We provide new evidence on the drivers of the pass-through of exchange rate movements into consumer prices across four decades and close to a hundred countries, combining econometrics and random forests. Random forests are particularly useful for modelling highly non-linear relationships, as well as for identifying the relative importance of the different theoretical factors that can affect the degree of pass-through. We find that the size of the economy, which tends to be related to the extent of pricing-to-market, and the level of inflation emerge as the factors most strongly associated with exchange rate pass-through, followed by product homogeneity and the volatility of the exchange rate. As we show, several of these covariates display a non-linear relation with exchange rate pass-throughs. We also document important implications of macroeconomic policy regimes and outcomes, including those related to fiscal policy, for exchange rate pass-through.
Keywords:	inflation, exchange rate pass-through, Phillips curve
JEL:	E30 E31 E58 F31 F41
Date:	2026–07
URL:	https://d.repec.org/n?u=RePEc:bis:biswps:1371

By:	Danilo Leiva-León; Rodrigo Sekkel; Luis Uzeda
Abstract:	We develop a Trend-Cycle Bayesian VAR that jointly estimates the real neutral rate of interest, r_t^, and identifies monetary policy shocks. A key innovation is that cyclical shocks, notably monetary policy shocks, can affect the trend of macroeconomic variables, providing a way to assess whether transitory disturbances have persistent effects. Using external instruments, we find that contractionary shocks reduce r_t^ and lower trend GDP growth. Although they generate sizable movements, their contribution to the secular decline in r_t^* is modest and slightly positive since the early 1990s. Cross-country evidence shows similar patterns.
Keywords:	Models and tools, Econometric, statistical and computational methods, Monetary policy, Monetary policy framework and transmission, Monetary policy tools and implementation
JEL:	C32 C51 E32 E44
Date:	2026–03
URL:	https://d.repec.org/n?u=RePEc:bca:bocawp:26-6

By:	Christos Antonios Statheas; Iacovos Sterghides; Marios Zachariadis
Abstract:	We use inflation expectations survey data for households across the euro-area from 2004:1 to 2025:2 to construct two direct measures of inattention: one based on individual perception errors about current inflation, and a second based on individuals who do not know the current inflation rate. We find that the heterogeneity of the impact of aggregate noise across education levels is significantly more evident for perception errors as compared to the second measure. Importantly, perception-errors-based inattention declines with individuals’ early lifetime inflation experience and rises with recent experience. By contrast, the measure based on those who don’t know the current inflation rate does not respond systematically to households’ lifetime inflation experiences across these countries. We also find that inattention as measured by current inflation perception errors is lower in most of these euro-area economies after the arrival of extreme adverse shocks and for individuals with ‘greater skin in the game’, but not according to the second measure which does not exhibit as clear a pattern across countries. Relating these measures to forecast errors, we show that while higher perception errors relate to over-prediction of the future inflation rate and higher inflation forecast inaccuracy, the opposite is true for the measure based on those who don’t know the current inflation rate due to compositional effects unrelated to inattention. Unlike the latter, perception errors systematically produce results in line with economic theory.
Keywords:	inflation expectations; lifetime experience; forecast errors; behavioral; belief heterogeneity; Central Bank communication.
JEL:	D84 E31 E70
Date:	2026–07–30
URL:	https://d.repec.org/n?u=RePEc:ucy:cypeua:01-2026

By:	Bittner, Christian; Jamilov, Rustam; Saidi, Farzad
Abstract:	We develop a quantitative macroeconomic framework with heterogeneous financial intermediaries and liquidity management. Banks manage idiosyncratic deposit withdrawal risk through an iterative over-the-counter interbank market with endogenous intensive and extensive margins and equilibrium positive-assortative matching based on balance sheet size. We validate our framework using administrative data from Germany encompassing the universe of bank-to-bank exposures. Our findings strongly support the presence of positive-assortative matching in the data, thereby confirming the model's key mechanism. We show that assortative matching is stable but inefficient relative to the constrained-efficient benchmark, leading to reduced trading volumes and a broader region of inaction in the interbank market, a smaller and riskier banking sector, and lower aggregate demand. Using our empirically validated framework, we study the transmission of monetary policy, secular trends in interbank trading and banking concentration, and the role of deposit market power.
Keywords:	Interbank markets; Monetary policy
JEL:	E44 E52 G20 G21
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19891

By:	Yuteng Cheng; Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang
Abstract:	We study the optimal design of a central bank digital currency (CBDC) in an economy where private payment service providers (PSPs) collect and monetize transaction data and may have market power. Payments data create social benefits through law enforcement and monitoring but also impose privacy costs and negative externalities by enabling profiling and surplus extraction. In our model, the central bank chooses CBDC fees, transaction rewards, and data-collection intensity, taking into account their effects on private payment adoption. We show that a data-collecting CBDC can either raise or lower private payment adoption and aggregate data production relative to cash, depending on the balance between PSP market power and the social costs of privately monetized data. In a calibration to the U.S. economy, the introduction of CBDC raises aggregate data collection, private PSP market share, and PSP profits. But when PSP competition is stronger, data are more valuable, or data-processing costs are lower, the optimal CBDC policy reduces aggregate data production if negative data externalities are sufficiently strong.
Keywords:	Money and payments, Digital assets and fintech, Payment and financial market infrastructures, Retail payments
JEL:	G2 L14
Date:	2026–06
URL:	https://d.repec.org/n?u=RePEc:bca:bocawp:26-21

By:	De Sanctis, Alessandro; Gebauer, Stefan; Holm-Hadulla, Fédéric; Sirani, Matteo
Abstract:	We show that monetary policy transmission is shaped not only by a sector’s own financial frictions but also by those prevailing in the broader production network. The latter, indirect frictions amplify the output and price effects of monetary policy and empirically dominate the direct ones. The amplification results from a downstream demand channel, as customers respond to tighter policy by purchasing fewer inputs. This is partly offset by an upstream cost channel, reflecting that suppliers raise prices to protect margins when financing costs rise. We inspect the mechanism in a multi-sector general equilibrium model with input-output linkages and working-capital constraints. JEL Classification: C32, C67, E31, E32, E52
Keywords:	financial frictions, input-output linkages, monetary policy, production networks
Date:	2026–08
URL:	https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263271

By:	Gürkaynak, Refet
Abstract:	With the notable exception of Turkey, the post-Covid inflationary episode in Emerging Europe followed the same contours as in advanced economies and was primarily due to external shocks, especially in energy prices. The Turkish case was due to misguided monetary policy that led to inflation that is an order of magnitude higher and more persistent. Emerging European countriesâ€™ post-Covid inflation surges depended on their exposure to energy prices based on the weight of energy in the consumption basket and the energy intensity of production, as well as the share of imported energy used in the country. In these regards, Emerging European countries were no different from euro area countries.
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19822

By:	Guillaume Roussellet
Abstract:	Monetary policymakers closely monitor the term structure of sovereign bond yields to uncover market participants’ beliefs about the future monetary policy stance, inflation, and activity. A particular object of interest is the natural real rate of return, or “r-star, ” which acts as a guide for monetary policy decisions. Numerous papers have questioned how much information investors possess, and how precisely they know r-star. In this post based on a recent Staff Report, we explore what the term structure of interest rates can teach us about r-star and its perception by investors.
Keywords:	r-star; Subjective beliefs; Incomplete information; term structure of interest rates
JEL:	E58 E43
Date:	2026–08–04
URL:	https://d.repec.org/n?u=RePEc:fip:fednls:103600

By:	Mr. Francesco Grigoli
Abstract:	I study how the production network shapes monetary policy transmission to prices. Using U.S. data, I show that industries farther upstream from final demand exhibit larger cumulative price responses to monetary shocks, while downstream industries absorb shocks through output. A calibrated multi-sector New Keynesian model rationalizes these patterns: upstream sectors, which sell predominantly to other firms, reprice more frequently and therefore exhibit less price rigidity. A counterfactual decomposition of the price response shows that this heterogeneity in price rigidity---rather than cost-cascade propagation through input-output linkages---is the primary driver of the cross-sectional responses. The upstreamness differential is strongly asymmetric, large following expansionary shocks but nearly absent following contractionary ones, consistent with asymmetric price rigidity compounding across production stages. Together, these findings suggest that monetary policy's potency depends on the production network's architecture.
Keywords:	production networks; price rigidity; monetary policy transmission; input-output linkages; asymmetric price adjustment
Date:	2026–06–26
URL:	https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/127

By:	Erceg, Christopher J.; Lindé, Jesper; Trabandt, Mathias
Abstract:	A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation, and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of â€œlooking throughâ€ supply shocks is a good policy for small shocks when inflation is near the central bankâ€™s target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of â€œgoing the last mileâ€ â€”i.e., a tight stance aimed at returning inflation quickly to targetâ€”can be substantial.
Keywords:	Inflation dynamics
JEL:	E1 E3 E5
Date:	2024–12
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19809

By:	Mitchener, Kris; Wandschneider, Kirsten
Abstract:	The Great Depression is the canonical case of a widespread currency war, with more than 70 countries devaluing their currencies relative to gold between 1929 and 1936. What were the currency warâ€™s effects on trade flows? We use newly-compiled, high-frequency bilateral trade data and gravity models that account for when and whether trade partners had devalued to identify the effects of the currency war on global trade. Our empirical estimates show that a countryâ€™s trade was reduced by more than 21% following devaluation. This negative and statistically significant decline in trade suggests that the currency war destroyed the trade-enhancing benefits of the global monetary standard, ending regime coordination and increasing trade costs.
JEL:	F14 F33 F42 N10 N70
Date:	2025–01
URL:	https://d.repec.org/n?u=RePEc:cpr:ceprdp:19839

By:	Martin Sanchez, Endika
Abstract:	This paper introduces and evaluates the Average Effective Consumer Price Index (AECPI) as a complementary indicator to the traditional Consumer Price Index (CPI). While the official CPI is based on an “average” consumption basket, it systematically fails to capture the heterogeneity of household budget constraints. The AECPI addresses this limitation by transitioning from a theoretical macroeconomic final consumption approach to an effective "cash-flow" paradigm, adjusting its weights according to observed household spending distributions derived from the Household Budget Survey (HBS). Crucially, by substituting the imputed Rental Equivalence method with a Payment Approach for housing costs, the AECPI accurately reflects the structural budget rigidity of lower- and middle-income strata (where housing weights surge from ~12% to over 31%). This approach provides a more accurate representation of the effective impact of inflation on household welfare. Empirical evidence for Spain (2007-2024) reveals a cumulative structural understatement by the official CPI of 5.01 percentage points. In extreme volatility contexts, such as the 2021 energy crisis, the gap between the AECPI and the official CPI peaked at nearly 4 percentage points (10.53% vs. 6.55%), evidencing a severe, unrecorded erosion of purchasing power. The paper discusses the methodological advantages, empirical validity, and potential applications of the AECPI in socioeconomic analysis, highlighting its necessity for targeted public policy, tax deflation, and the preservation of social cohesion in macroeconomic contexts characterized by asymmetric inflation and growing inequality.
Keywords:	Inflation, CPI, AECPI, household spending, inequality, economic policy, official statistics, Cost-of-Living Index (COLI), Payment Approach
JEL:	C43 D31 E31
Date:	2026–03
URL:	https://d.repec.org/n?u=RePEc:pra:mprapa:128331